Assignment III_new

Assignment III_new - Assignment III Aggregate Demand and...

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Assignment III – Aggregate Demand and Aggregate Supply – due 11/12: 1. We want to study what happens to GDP and prices as an economy is hit by a shock. For each question, mark clearly the axis, the curves and the equilibria. (i) Draw the aggregate demand curve, and the short run and long run aggregate supply curves for a country. Assume that the country starts in long-run equilibrium. (ii) The economy is hit by a negative demand shock. Illustrate the shift(s) in your diagram. Mark clearly the price level and output in the new equilibrium. (iii) What could have caused a negative demand shock? List at least 2 events. (iv) What will happen over time in this economy if it is left to itself? Illustrate how curve(s) will shift, and explain briefly why. Mark clearly the new long-run equilibrium levels of output and the price level. (v) Assume instead that the government decides to use active fiscal policy to revert the economy to long-run equilibrium because they are concerned about the situation. Why may the
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This note was uploaded on 04/23/2011 for the course ECON 106 taught by Professor Lonning during the Fall '09 term at DePaul.

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Assignment III_new - Assignment III Aggregate Demand and...

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